Deluxe Corporation

You are currently holding for the Deluxe Quarterly Earnings Conference Call. We are admitting additional participants and plan to be underway shortly. We appreciate your patience and ask that you please remain on the line. Ladies and gentlemen, thank you for standing by and welcome to the Deluxe Quarterly Earnings Conference Call. All participants are currently in a listen-only mode and today's call is being recorded. At this time, I would like to turn the conference over to your host, Vice President of Strategy and Investor Relations, Brian Anderson. Please go ahead.

Thank you, Operator, and welcome to the Deluxe Second Quarter 2025 Earnings Call. Joining me on today's call are Barry McCarthy, our President and Chief Executive Officer, and Chip Zint, our Chief Financial Officer. At the end of today's prepared remarks, we will take questions. Before we begin, and as seen on the current slide, I'd like to remind everyone that comments made today regarding management's intentions, projections, financial estimates, and expectations about the company's future strategy or performance are forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. Additional information about factors that may cause actual results to differ from projections is set forth in the press release furnished today in our Form 10-K for the year-ended December 31, 2024, and in other SEC company filings. On the call today, we will discuss non-GAAP financial measures, including comparable adjusted revenue, adjusted and comparable adjusted EBITDA and EBITDA margin, adjusted and comparable adjusted EPS, and free cash flow. All comparable adjusted metrics reflect the removal of impacts from business exits. In our press release, today's presentation, and our filings with the SEC, you'll find additional disclosures regarding the non-GAAP measures, including reconciliation of these measures to the most comparable measures under U.S. GAAP. Within the materials, we are also providing reconciliations of GAAP EPS to adjusted EPS, which may assist with your modeling. And with that, I'll hand it over to Barry.

Thanks, Brian, and good evening, everyone. Our second quarter was highlighted by strong results across each of our core profitability metrics, including a tenth consecutive quarter of -over-year comparable adjusted EBITDA growth. I'll begin my comments tonight by acknowledging our top line of $521 million was down .5% from the second quarter of last year, softer than our expectations, but fully attributable to the low margin promotional portion of print, which I will detail in a moment. Importantly, each of our other businesses performed as expected, and we generated strong results across all other financial metrics. For the quarter, we grew -over-year comparable adjusted EBITDA over .5% to $106 million. We expanded margin rates by 140 basis points to just above 20%. Comparable adjusted EPS increased .5% to $0.88. -to-date free cash flow expanded by 200% or more than $34 million versus the first half of 2024. We improved our leverage ratio to 3.5 times and remain on path to be below three times next year. And we're affirming our overall full year revenue and earnings guidance and increasing our free cash flow guidance. Now moving on to some operating segment highlights. The data solution segment continued to be the standout, delivering more than 18% second quarter revenue expansion. Observers of the most recent cycle of bank earnings results may have noted successful demand deposit generation campaigns as an important earnings driver. We're proud that our data segment had a role in many of those successes across our FI partners. Merchant services growth expanded sequentially to just under 3%, despite lingering macroeconomic uncertainty impacting the broader domestic spending environment. B2B payments delivered expected low single-digit growth consistent with our prior guidance. We're pleased with our margin expansion of more than 200 basis points and have a number of customer wins and implementation across the business. The stronger margin check portion of our print segment performed in line with our long-term expectations, declining about 3%, helping the segment to hold on to its healthy margin rate. The low margin branded promo portion of the print segment is where revenues were challenged during the quarter. In addition to the first quarter deal timing and industry demand headwinds we signaled last quarter, second quarter results were impacted by non-renewal of a few large one-time orders requiring unattractive margin levels. As we've discussed previously, our strategy is to avoid source promo deals with unattractive margins even at the expense of revenue. Importantly, as would be expected under such a strategy, resulting revenue headwinds during the quarter had nominal impact on the segment's profitability. Overall, we maintained our strong print segment margins at 32%. As we discussed at each call, we see this margin rate and the predictable cash flows from print, especially the legacy check business, continuing for the foreseeable future. We would not expect the second quarter rates of decline within branded promo to recur over the balance of the year. Finally, on our overall outlook, as I mentioned earlier, we're pleased to affirm our revenue and earnings guidance and increase our full-year expectations for free cash flow. Chip will have more on all of this in a moment. At the midpoints of the year, our revenue ratio remains modestly weighted toward print at 54% to 46%. For additional perspective, payments and data together already deliver significantly more than the legacy check portion of print alone. On a -to-date basis, our combined payments and data segments have expanded year over year by a blended rate of just under 7.5%, consistent with our strategy as and is shown on the current slide. Finally, I'd like to discuss two additional topics relating to our payments progress in particular. One, the small acquisition we have announced, and two, partnership development across our two payment segments. First, for some context around the announced acquisition, our existing platform, the Deluxe Payment Network, or DPN, digitally connects physical lock boxes. This interlockbox payment network saves cost by eliminating postage, envelopes, labor, handling, and check costs for payers, including large bill pay services across the FI landscape. For payees, there's virtually no change because the payments through the DPN follow the well-established lockbox payment protocol, but now digitally. Consistent with our capital allocation priorities, the check match product will bolt onto our existing DPN platform, expanding our scale and creating both revenue and cost synergy opportunities. Deluxe is the obvious neutral third party to create and manage an expanded digital network, and we're already in the process of enabling DPN across more than 5,000 eligible Deluxe locks boxes. With this acquisition, JP Morgan lock boxes and those of several large FIs already members of CheckMatch will be added to the DPN network. As a trusted partner to our FI clients, Deluxe is positioned to scale the network more effectively than any individual bank or group of banks. We do not expect this acquisition to have a material impact to our 2025 B2B segment results, but do expect to see positive impact as it scales across 2026 and beyond. We would expect to see a couple points of growth for the B2B segment when fully scaled, and we will provide periodic updates moving forward. Next, I'll highlight the progress our payments businesses are making in building partnerships with software vendors and other technology providers. You saw us announce a few of these partnerships during the recent quarter. These alliances are strategically important because our solutions get embedded in these partners' offerings, so we grow when the partner grows. Customers acquired via our partners generally have higher attention, and their volumes tend to be solid. Recently completed merchant partnerships with ISVs such as Chargent and embedded CRM automation solution support our -to-market growth plans. Partnering with fundraising platforms such as SchoolAuction.net and child care center operational solutions such as MyKid reports will continue to further enable our growth outlook. Across B2B payments, similar alliances with technology and platform partners such as Square9, BANCO, and AccuTitle provide platform and vertical expansion opportunities spanning the attractive treasury automation and SaaS growth markets. To summarize, our overall second quarter and -to-date results illustrate our ongoing operating leverage and execution focus. Importantly, our results highlight our ongoing shift towards the growing payments and data markets. While some general macroeconomic uncertainty remains, our first half progress enables us to affirm our 2025 core guidance and our strong execution allows us to raise the free cash flow outlook. Finally, before passing this to Chip, I want to acknowledge the company has reached its 110th anniversary. Since 1915, Deluxe has delivered for our customers, shareholders, and communities because of the incredible dedication and commitment of Deluxe-ers. Our people make the difference. Over the last few years, we've made great progress transforming a paper payments company into a powerful digital payments and data company, and the best is yet to come. With